Beztec Limited produces two models of Printers: the Lexon, which Beztec has produced since 2014 and sells for $990; and the Protox, a newer model introduced in 2016 that sells for $1254. Based on the following income statement for the year ended 31 December 2017, senior management at Beztec have decided to concentrate marketing resources on the Protox model and to begin to phase out the Lexon model because the Protox generates a much bigger operating profit per unit.
Beztec Limited Income statement for the financial year ended 31December 2017 |
|||
Lexon |
Protox |
Total |
|
Revenues |
$23 760 000 |
$7524 000 |
$31 284 000 |
Cost of goods sold |
15 048 000 |
5 266 800 |
20 314 800 |
Gross margin |
8 712 000 |
2 257 200 |
10 969 200 |
Selling and administrative expense |
6 996 000 |
1 613 700 |
8 609 700 |
Operating income |
$1 716 000 |
$643 500 |
$2 359 500 |
Units produced and sold |
24 000 |
6 000 |
|
Operating income per unit sold |
$71.50 |
$107.25 |
Details for cost of goods sold for Lexon and Protox are:
Lexon |
Protox |
|||
Costs |
Total |
Per unit |
Total |
Per unit |
Direct materials |
$5 491200 |
$228.80 |
$3 854 400 |
$642.40 |
Direct production laboura |
475 200 |
19.80 |
277 200 |
46.20 |
Machineb |
3 801 600 |
158.40 |
475 200 |
79.20 |
Total direct |
$9 768 000 |
$407.00 |
$4 606 800 |
$767.80 |
Production overheadc |
$5 280 000 |
$220.00 |
$660 000 |
$110.00 |
Total cost of goods sold |
$15 048 000 |
$627.00 |
$5 266 800 |
$877.80 |
a Lexon requires 1.5 hours per unit and Protox requires 3.5 hours per unit. The direct production labour rate is $13.20 per hour.
bMachine costs include lease costs of the machine, repairs and maintenance. Lexon requires 8 machine-hours per unit and Protox requires 4 machine-hours per unit. The machine-hour rate is $19.80 per hour.
c Production overhead costs are allocated to products based on machine-hours at the rate of $27.50 per hour.
Beztec’s management accountant, Sue Smith, is advocating the use of activity-based costing and activity-based management and has gathered the following information about the company’s production overhead costs for the year ended 31December 2017.
Activity-cost-driver quantities |
||||
Activity-cost driver (driver quantity) |
Total activity costs |
Lexon |
Protox |
Total |
Soldering (number of solder points) |
$1165725 |
1 333 125 |
433 125 |
1 766 250 |
Shipments (number of shipments) |
1064250 |
18 225 |
4 275 |
22 500 |
Quality control (number of inspections) |
1534500 |
63 225 |
23 963 |
87 188 |
Purchase orders (number of orders) |
1176120 |
90 113 |
123 727 |
213 840 |
Machine power (machine-hours) |
71280 |
198 000 |
18 000 |
216 000 |
Machine set-ups (number of set-ups) |
928125 |
18 000 |
15 750 |
33 750 |
Total production overhead |
$59400000 |
After completing her analysis, Smith shows the results to Steven Kay, the CEO of Beztec. Kay does not like what he sees. ‘If you show headquarters this analysis, they are going to ask us to phase out the Protox line, which we have just introduced. This whole costing stuff has been a major problem for us. First, Lexon was not profitable and now Protox.
‘Looking at the ABC analysis, I see problems. First, we do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would be different. We can’t afford to phase out either product, please alter the costs produced by the ABC system.’
Smith knows that her numbers are fairly accurate. As a quick check, she calculates the profitability of Lexon and Protox using more and different activity drivers. The set of activities and activity rates she had used results in numbers that closely approximate those based on more detailed analyses. She is confident that headquarters, knowing that Protox was introduced only recently, will not phase out Protox. She is also aware that a sizeable portion of Kay’s bonus is based on division revenues. Phasing out either product would adversely affect his bonus. Still, she feels some pressure from Kay to do something. She asks for your advice.
Requirements:
a) Complete a profitability analysis by calculating the gross profit and gross profit percentage per unit for both models under ABC system.
b) Advise Smith on how she should respond to Kay’s suggestion that she alter the costs produced by the ABC system. You should discuss APES 110 Code of Ethics for Professional Accountants.
Beztec Limited produces two models of Printers: the Lexon, which Beztec has produced since 2014 and...
Sutcliffe Electronies Sutcliffe Electronics, a division of Best Corporation, manufactures two large-screen television models, the Mammoth, which has been produced since 2015, and sells for $990, and the Maximum, a newer model introduced in 2016 that sells for $1,254. Based on the following income statement for the year ended November 30, 2019, senior management at Best Corporation has decided to concentrate Sutcliffe's marketing resources on the Maximum model and to begin to phase out the Mammoth model because Maximum generates...
5-41 ABC, implementation, whics (CMA, adapted) Plum Electronics, a division of Berry Corporation, manufactures two large-screen television models: the Mammoth, which has been produced since 2010 and sells for $990, and the Maximum, a newer model introduced in early 2012 that sells for $1,254. Based on the following income statement for the year ended November 30, 2014, senior management at Berry have decided to concentrate Plum's marketing resources on the Maximum model and to begin to phase out the Mammoth...
Problem 5.37A a-b Jacobson Electronics manufactures two HD television models: the Royale, which sells for $1,400, and a new model, the Majestic, which sells for $1,100. The production costs calculated per unit under traditional costing for each model in 2020 were as follows: Royale Majestic 1600 Traditional costing Direct materials Direct labour ($20 per hour) Manufacturing overhead ($35 per direct labour hour) Total per unit cost 100 140 175 $875 $540 In 2020, Jacobson manufactured 20,000 units of the Royale...
Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,480, and a new model, the Majestic, which sells for $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows. Traditional Costing Royale Majestic Direct materials $660 $420 Direct labor ($20 per hour) 120 100 Manufacturing overhead ($40 per DLH) 240 200 Total per unit cost $1,020 $720 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000...
Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,480, and a new model, the Majestic, which sells for $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows. Traditional Costing Royale Majestic Direct materials $660 $420 Direct labor ($20 per hour) 120 100 Manufacturing overhead ($40 per DLH) 240 200 Total per unit cost $1,020 $720 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000...
Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,480, and a new model, the Majestic, which sells for $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows. Traditional Costing Royale Majestic Direct materials $660 $420 Direct labor ($20 per hour) 120 100 Manufacturing overhead ($40 per DLH) 240 200 Total per unit cost $1,020 $720 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000...
ABC QUESTION: Owl Ltd This company has a subsidiary called Birdy Limited and is worried about the costing process Birdy Ltd makes two products, Feathers and Claws. It currently recovers overheads using a rate per direct labour hour. Information relating to each of these products is set out below. Claws £91 18,000 units 800 5 hours Feathers Selling price per unit £52 Annual sales volume 15,000 units Number of sales invoices issued each year 200 Labour time per unit 2...
Way Cool produces two different models of air conditoners. The company produces the mechanical systems in its components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow Process Activity Components Changeover Machining Setup 120 Overhead Driver Quantity Cost Number of $500,000 800 batches 279,000 Machine hours 6,000 225,000 Number of setups $1,004,000 $ 180, 300 Welding hours 3,000...
Crane Electronics manufactures two ultra high-definition television models the Royale which sells for $1.54 Majestic, which sells for $1.270. The production cost computad par unit under traditional costing for each model in 2020 wasas follows. Traditional Costing Direct materials Direct labor($20 per hour) Manufacturing overhead ($42 per DLH) Tatal per unit cost Royale $600 120 252 $1,012 Majestic $410 100 210 $720 In 2020, Crane manufactured 25,000 units of the Royale and 10,000 units of the Majestic. The overhead rate...
Schultz Electronics manufactures two ultra high-definition television models: the Royale which sells for $1,580, and a new model, the Majestic, which sells for $1,320. The production cost computed per unit under traditional costing for each model in 2020 was as follows. Traditional Costing Direct materials Direct labor ($20 per hour) Manufacturing overhead ($40 per DLH) Total per unit cost Royale Majestic $600 $400 120 100 240 200 $960 $700 In 2020, Schultz manufactured 25,000 units of the Royale and 10,000...